Mortgages are getting cheaper: WHY?

The Federal Reserve raised its overnight rate again a little over a month ago, and as a result, there are a lot of people who were expecting that mortgage rates would go up as well. However, this assumption has gone wrong as mortgage rates have since declined in the period after. Current mortgage rates have slid to around 4.04% this past week, according to Bankrate. For 30 year rates, this is now the lowest rate we’ve seen this year.

The increase in the Federal Funds overnight rate is costing Banks more to borrow money. In turn, this will result in higher costs for customers across many short-term loan products. Mortgage rates, however, tend to move in line with the 10-year Treasury Note, which is issued by the US Government, and is known as the safest investment in the world. These notes are widely traded now, and with an increase in demand for them, their rates are going down.

As explained by Mark Hamrick, a Senior Economic Analyst at Bankrate, the country has experienced a reverse of the Trump trade. Starting with the night of the election, many predicted that a Trump administration would be very business friendly, delivering rapid growth. Expectations that Trump would deliver on tax reform and massive infrastructure investment led to a significant increase in stock prices and Treasury yields. Along with this rise in yields, borrowing on mortgages became more expensive.

However, with time, it is becoming clear that domestic issues and global uncertainty will cause the White House to not be nearly as productive with the things they have promised. This is the reason that yields have reversed course and started to decline. As explained by Hamrick, it was clearly predicted that all of the Administration’s goals would be accomplished in a short span of time, but as reality is showing, there are many challenges present. This uncertainty has put downward pressure on yields, as the bond market does quite well during times of conflict and uncertainty. Now that investors are seeing a different situation than they did on election night, mortgages rates are following Treasury yields, and slowly sliding downward.

Len Kiefer, Deputy Chief Economist for Freddie Mac, explains that it is likely we will experience higher rates by the end of the year, maybe up to 4.5%. But while it is clearly known that an increase in mortgage rates will add to the total cost of a home purchase, it is expected that this will not affect overall purchase activity this year.